The quest for wealth

The path to long-term fi­nan­cial se­cu­rity is strewn with un­cer­tainty and com­plex­ity. Agost A. Mak­szin, Part­ner of St. James’s Place Wealth Man­age­ment ex­plains the five prin­ci­ples which can help keep you on track. There was a time when sav­ing and in­vest­ing for the fu­ture was con­sid­ered a rel­a­tively un­com­pli­cated af­fair that felt many steps re­moved from the in­tri­ca­cies of fi­nance and global eco­nomics. Progress in re­cent decades – from the so­phis­ti­ca­tion of ev­ery­day tech­nol­ogy to the ready avail­abil­ity of round-the-clock ser­vices – has sim­pli­fied many parts of our lives. But it has brought more com­plex­ity too, par­tic­u­larly in mat­ters of per­sonal fi­nance. Re­search con­sis­tently shows that many peo­ple find the decisions they need to make on sav­ing and in­vest­ing dif­fi­cult, de­spite the pro­fu­sion of in­for­ma­tion avail­able.The para­dox is that this con­fu­sion has deep­ened as fi­nan­cial ser­vices have mod­ernised.The real dan­ger is that peo­ple dis­en­gage from the process of how to cre­ate the wealth they need for their fu­ture. While many things have changed, there are a num­ber of con­stant prin­ci­ples on which in­vestors should base their strat­egy to help ful­fil their fi­nan­cial as­pi­ra­tions.The key rules that in­vestors should fol­low in their quest for wealth are sim­ply: 1. Make sure you have suf­fi­cient money on de­posit for your short-term needs.

2. Guard against in­fla­tion.

3. In­vest for the longer term.

4. Di­ver­sify your in­vest­ments.

5. Find the very best man­agers.

Old habits All over the de­vel­oped world, savers are en­dur­ing the low­est re­turns on cash for cen­turies; but many re­main wary of stock markets, de­spite their re­cov­ery from 2009 lows. In­stead, many con­tinue to ac­cu­mu­late cash; per­haps, over­whelmed by choice, it is eas­ier to cling to old habits. But dis­ap­point­ing rates are ex­pected to en­dure and the even­tual rise will be slow and low. In such an in­ter­est rate en­vi­ron­ment, those who wish to achieve mean­ing­ful re­turns will need to re­assess their sav­ings on de­posit. How­ever, cash does still play a vi­tal role in an in­vest­ment strat­egy, and enough should be kept on de­posit. As Chris Ralph, Chief In­vest­ment Of­fi­cer of St. James’s Place, says: “If you main­tain ad­e­quate liq­uid­ity, you should avoid the need to sell long-term in­vest­ments at a bad time. As a guide, you should have enough to be able to sleep at night, and cover both ex­pected needs and un­fore­seen emer­gen­cies.”

Loy­alty’s re­turn

In­vestors who hold enough cash can ig­nore pass­ing mar­ket sentiment; while those with short-term hori­zons are more likely to be dis­ap­pointed. Over the long term, in­vest­ment in real as­sets, such as eq­ui­ties, pro­vides the best chance of in­fla­tion-beat­ing re­turns. When the ‘dot­com bub­ble’ burst in March 2000, global eq­ui­ties tum­bled for three years; share prices rose un­til the 2008 fi­nan­cial cri­sis took markets to a low in March 2009. Since then, shares have climbed again, with ups and downs along the way, to near-record lev­els. Ralph com­ments: “In­vestors can­not con­sis­tently and suc­cess­fully time the markets, but those who hold as­sets for ex­tended pe­ri­ods can reap the cu­mu­la­tive ben­e­fit of time’s smoothing ef­fect on mar­ket fluc­tu­a­tions and un­fore­seen events.” No one knows what will hap­pen to share prices in the short term, but those who in­vest over a longer pe­riod – say five years or more – are likely to be bet­ter off than they are to­day.

Steady at­tri­tion One per­sis­tent ob­sta­cle that an in­di­vid­ual will need to over­come on the road to wealth cre­ation is in­fla­tion. Even mod­est lev­els of in­fla­tion can erode cash in a low in­ter­est rate en­vi­ron­ment. And all of us at some point in our lives are likely to live through at least one pe­riod of sig­nif­i­cant in­fla­tion. The ef­fects of in­fla­tion can be as se­vere as a sharp fall in markets. How­ever, whereas mar­ket dips are usu­ally fol­lowed by re­cov­er­ies, in­fla­tion per­ma­nently reduces the value of your sav­ings. While you should hold money on de­posit for short-term needs, there is sig­nif­i­cant risk in try­ing to play safe by putting all your money into cash-like in­vest­ments.When in­vest­ing for the long term, you should keep an eye on in­fla­tion.

The im­por­tance of di­ver­si­fi­ca­tion The old adage that in­vestors should not put all their eggs in one bas­ket still rings true. As well as the ap­pro­pri­ate level of cash,

it is im­por­tant to di­ver­sify as widely as pos­si­ble across dif­fer­ent in­vest­ments that can pro­tect against in­fla­tion.“The trick is to en­sure that the se­lec­tion of as­sets won’t re­act in the same way to mar­ket events or eco­nomic changes,” says Ralph. “Just as in­vest­ments will not rise at the same pace or time, you should en­sure that they do not fall at the same time ei­ther.”

Shares, bonds and com­mer­cial prop­erty are ex­am­ples of as­sets that can pro­vide growth. In­vest­ing in funds rather than in­di­vid­ual in­vest­ments also en­sures that money is more widely spread. And by in­vest­ing in a se­lec­tion of funds that di­ver­sify across dif­fer­ent shares, sec­tors and re­gions, as well as as­set classes, in­vestors will be bet­ter placed to with­stand shifts in eco­nomic and fi­nan­cial con­di­tions and achieve above-in­fla­tion re­turns over the long term.

Pathfind­ers Dif­fer­ent man­agers have dif­fer­ent styles and as­sets; but many in­vest in the same way, so va­ri­ety is no guar­an­tee of di­ver­sity. There are a large num­ber of fund man­agers to se­lect from; some are ex­cel­lent, some are very good, and some are not. “It is crit­i­cal to have an in­vest­ment ap­proach that gives the best chance for your money to be with good man­agers,” ad­vises Ralph. “Un­der­stand­ing how your ad­viser re­searches, se­lects and mon­i­tors the fund man­agers should be high on your list of pri­or­i­ties.” There are no paths for in­vestors that are risk-free and there prob­a­bly never were. Mak­ing an in­formed and con­fi­dent choice is not an easy task.The key to build­ing long-term wealth is a re­al­is­tic as­sess­ment of needs and goals that re­flects a level of risk that feels com­fort­able. In­di­vid­u­als are of­ten ret­i­cent about re­view­ing their ap­proach to wealth cre­ation; but ad­vice is the key for a planned, long-term in­vest­ment strat­egy and for peace of mind. The value of an in­vest­ment with St. James’s Place will be di­rectly linked to the per­for­mance of the funds se­lected and may fall as well as rise.You may get back less than the amount in­vested. Eq­ui­ties do not pro­vide the se­cu­rity of cap­i­tal as­so­ci­ated with de­posit ac­counts sub­ject to the De­posit Pro­tec­tion Scheme. To re­ceive a copy of The In­vestor, the mag­a­zine pro­duced by St. James’s Place Wealth Man­age­ment, please con­tact me at agost.mak­szin@sjpp.asia or to ar­range an obli­ga­tion-free meet­ing please call me on 2824-1083 / 5588-2212.

DIS­CLAIMER: The ‘St. James’s Place Part­ner­ship’ and the ti­tles ‘Part­ner’ and ‘Part­ner Prac­tice’ are mar­ket­ing terms used to de­scribe St. James’s Place rep­re­sen­ta­tives. Mem­bers of the St. James’s Place Part­ner­ship in Hong Kong rep­re­sent St. James’s Place (Hong Kong) Lim­ited, which is an au­tho­rised in­sur­ance bro­ker by be­ing a mem­ber of The Hong Kong Con­fed­er­a­tion of In­sur­ance Bro­kers CIB, a li­censed cor­po­ra­tion with the Se­cu­ri­ties and Fu­tures Com­mis­sion and reg­is­tered as an MPF In­ter­me­di­ary. St. James’s PlaceWealth Man­age­ment plc Reg­is­tered Of­fice: St. James’s Place House, 1 Tet­bury Road, Cirences­ter, Glouces­ter­shire, GL7 1FP, United King­dom. Reg­is­tered in Eng­land Num­ber 4113955.